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Student videos

Direct Taxes

  • Levels: GCSE, AS, A Level, IB, BTEC Level 3, BTEC Tech Award
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

In this short revision video we look at how a government can raise revenues from direct taxes.

Direct Taxes

What are direct taxes?

  • Direct taxes are paid directly by the individual or business to the government
  • The burden of the tax cannot be passed on to someone else
  • Typically they are taxes on income (including profits) and wealth

Main examples of direct taxes in the UK

  • Income Tax
  • Corporation Tax
  • Capital Gains Tax
  • National Insurance Contributions
  • Inheritance Tax

Notes:

Direct personal taxes comprise income tax and employees’ national insurance contributions

Corporation tax is a tax on business profits

Capital Gains Tax is a tax on the profit when you sell (or 'dispose of') something (an 'asset') that's increased

Inheritance Tax (IHT) is paid when a person's estate is worth more than £325000 when they die

Progressive nature of direct income tax

  • Income tax paid of £4,950 from a gross income of £35,000 = an average tax rate of 14.14%
  • Income tax paid of £15,500 from a gross income of £70,000 = an average tax rate of 22.14%
  • Income tax paid of £70,000 from a gross income of £200,000 = an average tax rate of 35%

With a progressive tax, the average rate of tax rises with income.

These three example calculations shows that income tax in the UK is progressive. In other words, those people on higher incomes pay a bigger % of their income in tax.

Key UK direct tax revenues in 2018-19

  • Income tax: £192 billion
  • National insurance contributions: £138 billion
  • Corporation tax: £57 billion
  • Capital gains tax: £9 billion
  • Inheritance tax: £5 billion

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